Friday, May 1, 2009

Niall Ferguson: Economists In A State Of Massive Denial

Niall Ferguson, an expert in economic history, has a devastating piece in The Australian. Mainstream economists, who have so far failed in understanding or appreciating every aspect of this crisis, deserve every ounce of the scorn he heaps upon them:

IT began as a sub-prime surprise, then became a credit crunch and is now a global financial crisis. At last month's World Economic Forum at Davos there was much finger-pointing - Russia and China blamed the US, everyone blamed the bankers, the bankers blamed everyone - but little in the way of forward-looking ideas. From where I was sitting, most attendees were still stuck in the Great Repression: deeply anxious, but fundamentally in denial about the nature and magnitude of the problem.

There were the people calling the bottom of the recession by the middle of this year. There were the people claiming India and China would be the engines of recovery. There were the people more worried about inflation than deflation. And, above all, there were the people trusting John Maynard Keynes would save us. I heard almost no criticism of the $US800 billion ($1.2trillion) stimulus package then making its way through Congress (and mutating as it went into something more like a pork barrel). The general assumption seemed to be that practically any kind of government expenditure would be beneficial, provided it was financed by a big deficit.

There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes's General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear. Read the whole thing

He goes onto argue the same thing we've been saying: That the problem is too much leverage and too much public debt and that it hardly makes sense to think that the solution requires more leverage and more debt. Everything that Obama has done -- and that guys like Krugman love so much -- assumes the problem is that we're not spending enough, and if that's what they judge the problem to be, it's hard to imagine the solutions are going to work out. Really, read the whole thing.